As already explained in several of our articles about the different changes introduced from time to time by the Brazilian government to the Tax on Exchange Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários - IOF), the IOF is a tax on credit and exchange transactions, insurance and securities assessed on the amount of bank loans and similar transactions, on the amount of foreign currency purchased or sold, on insurance premiums and the price of securities purchased or sold.

The applicable tax rate may vary from zero to 25% and depends on the kind of the operation. In the case of derivatives contracts, the maximum IOF rate is also 25%. Up to this ceiling (25%), the Executive Branch can amend the applicable rate at any time, considering the monetary and exchange policy goals of the Brazilian government. The current applicable IOF rate to derivatives contracts continues to be 1%, by force of Decree No. 7,536, of July 26, 2011.

The IOF is a regulatory tax and the rates are decreased or increased by the Brazilian government whenever the authorities decide to foster or reduce the inflow of foreign currency funds into the country.

Quoting the Brazilian Finance Minister, Guido Mantega, "sometimes the government shoots the buzzard and hits on the hawk" and then tries to remedy the situation. This happened with the Brazilian exporters, when Provisional Measure No. 539, of July 26, 2011 (MP 539/2011), subsequently converted into Law No. 12,543, of December 8, 2011(Law 12,543/2011)1, amended the IOF legislation, namely Decree-Law No. 1,783, of April 18, 1980 and Law No. 8,894, of June 21, 1994.

At that time, the following rules on securities transactions involving derivatives contracts were issued:

(a) in order to be valid all derivatives contracts must be registered with duly authorized entities, i.e. clearing houses or service providers which have been accredited by the Central Bank of Brazil (Banco Central do Brasil - Bacen) or by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) to operate with clearing, settlement and registry2;

(b) the entities authorized to register derivatives contracts are responsible for collecting the IOF, which is calculated on the amount of the transaction; and

(c) the amount of the securities transaction, for IOF purposes, is the adjusted notional value of the derivatives contract. The adjusted notional value is the reference value of the contract (notional value) revised to reflect the difference resulting from the derivatives´ price variation with respect to the underlying assets´ price variation.

The 1% IOF on derivatives contracts increased the cost of the hedge operations for the exporters. Trying to minimize this perverse effect, the Brazilian Congress introduced in Law 12.543/2011 the following set of norms:

(i) with respect to the hedge operations, as taxpayer the exporter can discount from the IOF due for each period the amount of the IOF calculated on the adjusted notional value of the derivatives contracts, in accordance with the rules issued by the Brazilian Secretariat of Federal Revenue (Secretaria da Receita Federal do Brasil - RFB);

(ii) if such discount is not possible, then the exporter may request the refunding or offset of the corresponding IOF value with tax and contributions administered by RFB, also in accordance with the rules issued by RFB;

(iii) the portion of the IOF discounted or offset will not be deductible for the purposes of determining the real profit (lucro real) and the Social Contribution on Net Profit (Contribuição Social sobre o Lucro Líquido - CSLL).

This system of refunding and offset was considered insufficient to compensate the exporters for the losses arising out of the additional cost represented by the 1% IOF.

Now by means of Decree No. 7,699, of March 15, 2012, published in the Official Gazette of the Union of March 16, 2012, the Brazilian government reduced to zero the IOF rate for any hedge operations involving derivatives contracts made by exporters. Exporter in this context means any individual or legal entity that exports Brazilian goods or services. However, this reduced rate will only apply if the total amount of currency exposure daily sold relating to hedge operations with derivatives contracts does not exceed 1.2 times the total value of the export transactions carried out on the previous year by the exporter holder of the derivatives contracts. For this purpose, the exporter must prove that the value of the export transactions justify the sold exchange exposure, considering the period of up to twelve months after the date the IOF is due. Otherwise the IOF will have to be collected with interest and fine for late payment.


1 Law 12,543/2011 authorized the Brazilian Monetary Council (Conselho Monetário Nacional - CMN) to establish specific conditions for the negotiation of derivates contracts, for monetary and exchange policy purposes, regardless of the nature of the investor, with powers to also (i) determine deposits over the notional value of the derivatives contract; and (ii) set forth limits, terms and other conditions for the negotiation of such contracts.

2 So far the only accredited clearing houses are: (i) CETIP OTC Clearing House (CETIP S.A. - Balcão Organizado de Ativos e Derivativos), which is the leading clearing house and central securities depository and derivatives registrar for operations carried out in the over-the-counter (OTC) market; and (ii) the Derivatives Clearing House (Câmara de Derivativos) of the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros). Other clearing houses or service providers may be accredited in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.